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Group buying has jumped the shark

Could Groupon be an $8bn a year business? How about a $25bn a year
business? Sound crazy? It's not -- at least to a number of observers,
including TechCrunch's Michael Arrington and TrialPay CEO Alex Rampell.

Group buying is already one of the hottest markets on the internet right
now, and if people like Arrington and Rampell are correct, it could be
one of the largest markets on the internet in short order. No wonder there are rumors about a billion-dollar acquisition of Groupon.

Unfortunately, the talk about Groupon is crazy and no matter how much one likes the group buying model, it's safe to say that group buying has jumped the shark.

What everyone seems to be forgetting: Groupon and its competitors don't really sell anything. They serve as agents for local businesses. Those local businesses not only discount their products and services significantly to get members of Groupon's audience through the doors, they pay a hefty commission for the privilege.

And they do all this with one major assumption: enough customers will return to make the exercise worthwhile (read: profitable). On market leader Groupon's website, for instance, business owners are told that a whopping 89% of businesses that have used Groupon believed that the customers delivered "were likely repeat customers."

Groupon also promotes that some 97% of the businesses it works with would use Groupon again. That obviously hints that Groupon businesses are receiving what they hoped to: new, loyal customers. But a recent survey conducted by Rice University's Jesse H. Jones Graduate School of Business painted a far different picture. Far fewer businesses surveyed -- just over half -- indicated that they'd use Groupon again. The study's authors noted:

There is widespread recognition among many business owners that social promotion users are not the relational customers that they had hoped for or the ones that are necessary for their business’s long-term success. Instead, there is disillusionment with the extreme price sensitive nature and transactional orientation of these consumers among many study respondents.

This, in a nutshell, is group buying's Achilles heel: the growing realization that group buying sites aren't delivering a vast audience of high-value consumers who are interested in patronizing the businesses they discover through their group buying purchases. Groupon's own data confirms this. According to The Wall Street Journal, Groupon's research found that only 22% of Groupon buyers go back to the businesses from which they purchased a Groupon. That, of course, is far less than the 89% figure Groupon touts on its website.

And there's good reason to believe that the ability of group buying sites to deliver loyal customers is constantly declining. After all, group buying is sprouting up everywhere. From startups receiving millions of dollars in funding to AOL to newspapers, everybody is jumping on the bandwagon. Make no mistake about it: this will have a viral, cannibalizing effect on whatever ROI these sites might ever hope to generate for the businesses that use them. After all, if you're a consumer, another great deal is always around the corner, so why ever pay full price? Other local businesses offering the same products or services will always have deals of their own. Just wait a few days. Further, as more and more businesses discount for the likes of Groupon, they erode their own perceived value, and destroy their own pricing power.

This is, of course, unsustainable. While Rampell writes, "I think Groupon can be the Amazon of Online2Offline commerce, and there’s no reason they can’t get to $25B in annualized revenue like Amazon, but at a much higher margin," he forgets a simple fact: Amazon sells real products at real profit. Groupon promotes loss leaders for local businesses who believe that they'll eventually have more than losses to show for it.

But many of them don't, so these businesses are essentially subsidizing Groupon's success to their own detriment. Which begs the question: how many local businesses are there out there which can afford to discount their products and services by upwards of 50%, while giving up 30-50% of the revenue to Groupon, and for how long?

For Groupon to be an $8bn-plus per year business, and to become the Amazon of online-to-offline commerce, thousands upon thousands of local businesses must have an unlimited ability to sell products and services unprofitably for years to come. For those who believe this is possible, the ghost of the .com boom is back and some great deals on bridges. Coming tomorrow on Groupon, of course.

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Comments (15)

The findings by Rice University are exactly in line with my experience with Groupon. I was shown all of the "statistics" of repeat business and how 97% of the businesses would use Groupon again. I tracked the redemptions of the people who came in to redeem a Groupon. Virtually every one got as close as they could to the $50 in merchandise purchased with the Groupon {for which I received $12.50} and bought no more. They were customers who we had not seen before, but we will in all likelihood not see them again. They were extremely price-sensitive and not interested in building a relationship with our business. I would not participate in any sort of Groupon promotion in the future.

over 7 years ago

Richard Greem

The thing with group buying sites are that they seem to be promoting deals so 'cheap' compared to normal, that people are only buying them because of that massively discounted price point. e.g drinks and breakfast at Altitude 360 is £97 normally and £39 on groupon.
That may sound stupid, but what I'm saying is the deals are almost too good, and therefore the customers that are being brought in aren't going to be able to afford to return. Say you don't mind spending £40 on breakfast - in the above example you are going to take the deal and enjoy a fantastic meal, but next week when you head out again you aren't going to return back there as it's out of your price bracket.
I know the deals need to be in the high %'s to get people to think 'wow', but it isn't conducive to return custom - for that to happen it needs to be a good deal on something that is already in a person's price bracket.

I'm not sure I agree with Mr. Robles; I certainly don't agree that the points he makes lead to his conclusions. Specifically

Amazon isn't worth what it is worth because it lists a lot of books for sale; it has a $73B market cap because lots of people buy lots of books there. The same will be true (or not true) for Groupon: Groupon will be worth a whole lot more if one million people subscribe to offers from one business than if a million businesses offer Groupons to 1 customer.

Promotion is a marketing tactic that some companies will use, and some will not. Regardless of whether a given company chooses to use this form of promotion, the demand for such promotions have always existed, and will continue to exist. Companies need to define their objectives with respect to this form of promotion, and design their efforts accordingly.

Groupon can be used to drive a loss leader promotional tactic: it will work best for companies that have a significant opportunity to cross-sell or up-sell people who walk in the door (which is why supermarkets have advertised loss leaders for decades).

Groupon can be an acquisition strategy, and will work best for companies that have a unique service (a local yoga studio is a good recent example). Statements that this is a poor acquisition strategy because "only 22% of Groupon buyers go back to the businesses from which they purchased a Groupon" are very naive when you consider that, for example, billions of dollars are spent every year on direct response acquisition campaigns that are very lucky to achieve 1.5% success.

Has Groupon jumped the shark? Certainly not yet. Will they eventually? Perhaps, and perhaps not - it is too early to tell, and too many things yet to happen will ultimately decide that question.

Will they need to revise their pricing structure? As more competitors come on board, eventually (and inevitably) "yes," but it will happen very slowly because Groupon will drop its prices not when businesses begin to jump ship, but rather when consumers do.

Does that mean that small businesses, will pay less to get the same result (as competition increases)? Inevitably, "no." This is a price play - businesses offering these promotions aren't going to make a lot of money on the promoted item. This tactic seeks to get people in the door, and to do that, you are probably going to have a better sale than your competitor.

Whatever Groupon's ultimate fortunes, one thing is true: consumers respond to promotions, and so there will always be a demand. And if this is true, then by what criteria should businesses consider adopting this sort of tactic? I've already mentioned the most important ones:

Your offering is unique enough that if people try it, they will continue to buy it (the yoga studio example);

Or, if you get people in the door with one heavily discounted product, it is likely that you can get them to walk out of the door with that heavily discounted product and enough full price products to make up the difference (the supermarket example);

And you are looking at an acquisition strategy that performs better than other strategies - and even if Groupon were only 5% successful in acquistions, it would be much better than most other current acquisition methods.

In the end, Groupon is only enabling a promotional tactic - it isn't doing anything to any business not asking for the service. Businesses considering Groupon (or some competitor) need to define their goals for this tactic, and then what they are willing to spend to achieve those goals.

over 7 years ago

Corrie Davidson, Social Media Manager at Sisarina, Inc

As a regular Groupon and LivingSocial buyer, this quote: "After all, if you're a consumer, another great deal is always around the corner, so why ever pay full price?" says it all. When I want to get my hair cut, I just wait for the next salon groupon - why pay full price? Unless a business offers a continuing discount after the fact, chances are, I didn't go to you before because I can't afford you, so after my deal, I won't be back.

Group buying users want to save money. Period.

Now, many a time groupon or livingsocial has turned me on to a place I didn't know about before. If I had a good experience there (Not always the case as I have found many business look down on groupon users once its time to redeem), then I recommend it to friends, but rarely do I return.

My favorite things to purchase are the experiences - things you CAN'T get elsewhere (or wouldn't normally spend the huge amount of money required to do). I have never bought a discounted restaurant or bar tab.

over 7 years ago

Miriam O'Flynn, Project Manager at esus Web Services

Good article. I totally agree that order volumes are not indicative of future customers.
I subscribed to Dublin Groupon a few months ago and have since bought 6 offers (some in multiples as gifts). None of them were products I'd have bought otherwise from THOSE companies, generally because their real prices are too high or because it's not a product I'd purchase often. So worth buying them at reduced prices to try, however, there was not a big enough difference in their service/offering to warrant going back again (at full price) compared to where I'd usually go.

For the consumer, I hope these sites stay around for a long time, but I wonder how many companies will be tracking retention to see if their eroded margins were really worth the investment. I think it will be a case of once bitten (by that shark maybe), twice shy for most.

over 7 years ago

Franco Lumi

The overall fundamentals of group buying sites such for the large and small ones (Groupon, Living Social and Daily City Connect in Miami) is to generate revenue for themselves as well as generate revenue for merchants and drive traffic to their businesses. However, once the group buying site has accomplished this it is the responsibility of the merchant and their staff to convert those new customers to repeat customers. Discounting the group voucher buyer as an undesirable customer leads to the failure of this conversion. Many of the merchants who belly ache that these promotions have not been beneficial to their business should more then anything else realize that perhaps the responsibility for the failure lies with them and their business practices.

I think you're missing the point, which is that overall fundamentals of group buying are flawed. Two specific examples:

1. Many of the individuals buying the deals are never going to become loyal customers because they can't afford to pay the full price. Perhaps you can afford a $50 dinner, but not a $100 dinner. If my restaurant feeds you for $50 once, I'll still never see you come back to pay $100.

2. Groupon et. al. essentially compete with the small businesses they're trying to help. If Groupon is constantly offering deals for local spas, for instance, it is reducing the incentives for members of its audience to frequent a previously featured spa.

It really doesn't matter who is 'responsible' for the failure of the model. Some might argue that the local business owners need to be more savvy. Others might argue that Groupon is misleading the business owners and in some cases, even taking advantage of them.

What really matters is that the model has inherent flaws and limitations and those are becoming more widely recognized. Groupon will not be able to develop a sustainable, long-term business until it addresses these flaws and limitations.

over 7 years ago

T Williams

We used groupon one time for our fitness business. About half took advantage of the offer and approx 20% of those purchased additional time. We did bring in a small amount of profit but on the downside is that we have such a significant decline in new registrations at our standard rate since that time. We get emails asking when we are going to offer another groupon. I see competitors also using group buying sites which makes it tempting to want to jump back in. But my question is, how low can the prices get and how much less product can we continue to offer before it affects everyone? I'm staying away and will maintain our pricing standards and high level of clientele. Your article is much appreciated.

Hi Patricio, I've appreciated your article and I want to share with you my beliefs.
Probably will happen with Groupon and all the other collective buying companies a simple thing - They will turn out to be normal promotional marketing companies!
As in any other system, during its initial stage, is difficult to forecast and there will always be some people optimistic and some don't.
With practically no barriers to entry, and with a location based dependence higher than usual on internet business models, I do believe that in 2-4 years we'll see a huge number of players worldwide, with some major ones.
However, I also believe that they will be able to sustain their profit margins given that, when compared to other promotional marketing channels, they present a much higher "buzz ability"!
Cheers!
Joao Goncalves

It depends on the nature of what is being sold from the small business perspective. We produce comedy shows and on average have seats going unfilled.

For us the Groupon worked really well. Shows are how we market our theater to students. The Groupon brought several packed shows.

I think if we had a product that we actually purchased rather than excess capaticty it would be different.

When I compare the increase show attendence to the same cost of a Google Adword Campaign or newpaper campaigns the Groupon was a huge success.Just by putting it out - we sold lots more full priced tickets due to the increased Web traffic.

David AlgerPan Theater

about 7 years ago

Suzanne Darnell

I just wanted to give another consumer's perspective. I have spent about $1000 I would not have otherwise spent in the last 6 months. I have purchased experiences that I would never have been aware of except for the advertising on group buying sites. I have gone into retail shops I would have never gone into except for my coupons. I have many more experiences to try. In all retail experiences I have spent at least 100% more than the coupon value eg) $110 at GAP with $50 value voucher, $160 on two visits while only using 1 $40 Body Shop voucher. At restaurants I have spent more than the voucher amount except for one cafe which gave me a deal that included almost everything I needed. I would have bought drinks there but when I walked in I realized thier voucher value was inflated so even though they got me to sample the voucher experience was negative because I saw them as dishonest. Never inflate over real prices! I can see that for some things I may not ever go back but in a lot of cases I never would have gone the first time so at the very least the store/restaurant/spa made me aware of their offerings.

about 7 years ago

Mary McCann

Groupon has definitely jumped the shark. I keep feeling ripped off when I buy a service because I just feel like I'm not being treated like a regular customer. E.g., I have to wait longer for an appt. I'm never sure I'm getting the full treatment. I feel like the quotes I get for services are a little inflated, etc and so on. Plus, the discounts are often exaggerated. The only things I buy now are concrete things I can compare the price for.

It would be interesting to see your point of view today. Groupon is declining, LivingSocial is climbing and the number of people and businesses who are dissapointed from the group buying model increases by the day! I do believe that the group buying model should jump to phase 2, but I am afraid I haven't seen phase 2 yet!

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